Four pillars policy has saved Australia's major banks: MacFarlane

Updated
March 03, 2009 02:07:00

Former Reserve Bank governor Ian MacFarlane believes Australia's so-called four pillars policy has saved the major banks from being crushed by the global financial crisis. Mr MacFarlane says it has allowed local banks to avoid the short-term risk-taking which has caused so much damage to the banking systems of the United States and Europe.

ALI MOORE, PRESENTER: Staying with banks and the country's former Reserve Bank governor believes Australia's so-called four pillars policy has saved the major banks from being crushed by the global financial crisis.

Ian Macfarlane saying it's allowed local banks to avoid the short-term risk taking, which has caused so much damage to the banking systems of the US and Europe. Andrew Robertson reports.

ANDREW ROBERTSON, REPORTER: The man who used to help keep Australia's financial system on an even keel has no doubt what's caused overseas banking giants to implode under the weight of loans that shouldn't have been made.

IAN MACFARLANE, FORMER GOVERNOR, RESERVE BANK: The unanimous view among bankers was you had to get big, otherwise you'd be swallowed, you had to achieve a higher return on equity and have a higher price earnings ratio than your competitors or they would take you over.

ANDREW ROBERTSON: Mr Ian Macfarlane was speaking at a top level conference in Sydney organised by the Australian Securities and Investments Commission. He argues that competitive law of the jungle in overseas markets led banks to take greater and greater risks to keep predators at bay. It's a view shared by ANZ boss Mike Smith, who described some of the lending practices of overseas banks as "mad".

MIKE SMITH, CEO, ANZ: You are probably the highest leveraged business in the business community, operating at the lowest margin. Therefore your margin for error is actually very low. So banks should be boring.

ANDREW ROBERTSON: Australia's big banks are protected from takeover thanks to what's unofficially known as the Four Pillars policy, and Mr Macfarlane believes it's importance in the current climate should not be underestimated.

IAN MACFARLANE: It's hard to avoid the conclusion that the difference was there was no competition for corporate control in Australia, which saved us from the worst excesses that characterise banking systems overseas.

ANDREW ROBERTSON: Also saving Australia's banks from themselves, according to Mr Macfarlane, is the fact that unlike some foreign competitors, they need to go to the market for a significant portion of the funds they lend out.

IAN MACFARLANE: Our banks' dependence on offshore borrowing made them determined to keep their high credit rating, and so they were aware that they couldn't take some of the risks that others were taking because they would jeopardise credit ratings and therefore their borrowing costs would rise.

ANDREW ROBERTSON: While no one argued that point ,the former Reserve Bank governor's belief is that too much competition in banking could be counterproductive was not universally endorsed.

GRAEME SAMUEL, CHAIRMAN, ACCC: If that were the case, than actually it's an argument, Ian, for getting rid of four pillars, and getting rid of Section 50 of the Trade Practices Act and consolidating more and more so you have even less competition, and you know, you can earn some great returns out of being almost a monopolist, which is the last thing, I think, we want to see.

ANDREW ROBERTSON: Mr Macfarlane says for him the proof of the four pillars policy effectiveness is Canada, which has a similar policy and is the only other oeCD country which has not had to use taxpayers' money to keep its banks afloat.